Advice to a young investor...

S

Stuck_At_Work

1,000+ Posts
A friend has finally decided to jump into the stock market. He is young and has no experience with trading. He wants to buy and hold for long term growth and wants broad exposure to the whole market. He also doesn’t have a large lump sum to invest. He would ideally like to invest a few hundred each month.

I recommended this plan for the first 6 months:

Month 1: A one time purchase (to reduce the impact of transaction fees) of Vanguard Total US Index.
Month 2: Repeat month 1.
Month 3: A one time purchase of Vanguard Rest of World Index.
Month 4: Repeat month 1.
Month 5: Repeat month 1.
Month 6: Repeat month 3.

I figure this will give him a solid foundation… and it’ll give him some time to look into other options.

Thoughts? Which broker would y’all recommend for his position?
 
That may be true, but Fidelity's have a lower expense ratio last time I checked and for me that's more important. On the whole Fidelity's service and performance is second to none.
 
I am in the same boat as the young investor... I am not a money person, so any help--however elementary--is much appreciated.

That said, do you smart money folks suggesting a jump into the market at this time? It seems like it would be good as you are acquiring stock at the low prices for long term growth, but maybe it is better to hold off until we've seen the worst? Thanks much for any insights.

By the way, I am planning something very similiar to the original poster's plan...
 
Learn how to dollar cost average your investments and you won't have to worry about whether it's a good time or not. Having said that, generally speaking this is bound to be a relatively good time to invest, although no one knows for sure. That's why dollar cost averaging your way into the market is a wise approach.
 
brntorng, I wasn't necessarily disagreeing with you. He should definitely go with the lower expense ratio. I guess I just have a feeling Fidelity Index Fund Expense Ratios won't stay low, while Vanguard's have withstood the test of time. I have somewhat of a friend who works for the Fidelity Austin branch who thinks the company loses money on their index funds. He hasn't said as much, but if they're losing money, I've gotta think their ER's are going to go back where they were: higher than Vanguard's. Fidelity has a lot more overhead than Vanguard, with all of their branch offices and advertising.

One thing to note is that Fidelity has a minimum initial investment on the total stock index fund of $10K while Vanguard's is only $3K. This could be the determining factor for now.

*I just remembered after posting: Have you read The Four Pillars of Investing? Towards the end of the book, he goes through the investment strategies for 4 very different first-time investors. One of the hypothetical characters ("Young Yvonne"?) is nearly identical to your friend.
 
If he decides to use Vanguard Funds, open directly at Vanguard. Zero additional costs (besides fund feeds).

Fidelity is no where as solid (read: disciplined) as Vanguard. Their fund managers and analysts generally get "caught" for some or the other SEC violations on an annual basis (including the "legendary" Peter Lynch). Use only if your company uses them.

Vanguard is the rock. Bet your house on them.
 
Nothing wrong with Vanguard, but we're talking about index funds here and expense ratio is a significant factor in that case. Now, if we're talking managed funds then it's a whole different discussion. It may be the case that Fidelity is subsidizing their index funds, but I don't really care. It's the bottom line that counts. However, if the minimum investment is too high, then that's a different matter.
 
Twenty-one years ago I began putting $300 a month into mutual funds through Fidelity. I put it into a variety of funds (Magellan, low-priced stock, Janus Overseas and others). After putting in $72,000 over the years my account is now worth about $57,800. While I still believe the market can bring significant results, it just hasn't happened with my choices yet. Needless to say it is a bit irritating. If I hadn't bought Apple several years ago it would be even worse.
 
a negative investing record over 21 years of dollar-cost averaging is quite surprising.

as benjamin graham says, mutual funds are an almost perfect investment. it is the "almost" part that ruins them. stick to the dry and boring market-tracking index funds. you'll never beat the market, but you'll come out ahead of most other investments.

as a young investor, i think your case just helps solidify the words of graham. 50% of my money is in index funds. other 50% in hand-picked stocks. guess, which one have lost money, and which one has made money?

also, as graham contends, "part time" stock picking is a dangerous proposition. you have to invest a lot of time and effort to actually find real gems that will beat the market. doable. but requires lots and lots of work.

anyway, a great majority of my future investments will go to index funds.
 
Index Funds are the way to go. You won't get the huge returns some stocks and funds can bring, but the market consistently returns around 8% over the course of time. This is what I was hoping to attain years ago and once I fell behind with Magellan I followed it up with other adviser picked losers. Sticking to index funds and very conservative methods (except for the Apple) has kept me from going further down.

Beware. Putting your money into the market without a decent plan is not a good thing to do. I'd have been better off putting my money into a savings account. 2001 killed me. The past year has been rough, but not near as bad.
 
Given the minimum investment of 3k per fund, what are the options to dollar cost average starting with only a few hundred per month?
 
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